Vonage trades at discount in debut

But Internet-phone firm succeeds in raising $531 mln

By

SteveGelsi

NEW YORK (MarketWatch) -- Vonage Holdings Corp.'s shares suffered the worst stock-market debut of the year Wednesday when Wall Street hung up on the Internet-telephony company.

The Holmdel, N.J.-based company's stock, in one of the highest-profile stock debuts of 2006, closed at $14.85, ending the day 12.7% below the $17-a-share price arrived at by the company's investment bankers. The stock opened at $17, giving those who bought into the deal at its IPO price, one brief opportunity to break even in Wednesday trading. Trading volume, at 33.3 million shares, exceeded the number of shares offered in the stock offering.

Till Vonage's inauspicious start on the New York Stock Exchange, the year's biggest Day 1 decline had been the 6.7% drop that Resource Capital Corp.
RSO, -3.01%
registered Feb. 6.

Vonage
VG, -3.09%
raised $531 million by offering 31.25 million shares through six major underwriters, led by Citigroup. The other bankers on the deal were Bear Stearns, Deutsche Bank, Piper Jaffray, UBS and Thomas Weisel.

Vonage's IPO is the second-richest offering in the Internet category in five years, according to Thomson Financial. Google Inc.
GOOG, -3.91%
raised nearly $2 billion in 2004.

In an unusual move, Vonage offered up to 13.5% of its stock to customers of its online phone service. See full story.

Francis Gaskins of IPODesktop said the IPO apparently drew interest from retail buyers, but institutional buyers avoided the stock because of red ink in the 5-year-old company's financials. From inception through March 31, Vonage's accumulated deficit was $467.4 million.

Growth and losses

Vonage has booked quick revenue and subscriber growth to the latest reported level of 1.6 million users, although it has never posted a profit. The company launched its U.S. service in late 2002.

The company, which offers phone service over the Internet at prices lower than those of traditional phone companies, may not have been completely surprised to see discount pricing emerge in its own stock.

Soleil SurTerre Research initiated coverage of Vonage with a hold rating and a $16 price target, below the company's $17 IPO price. "We are concerned about the level of competition in the voice telecom business and believe that the stock is pretty close to fairly valued at this level," analyst Todd Rethemeier said in a note to clients.

Vonage plans to use the roughly $494 million proceeds in the offering to fund expansion, including marketing expenses. The company also said it could make an acquisition or make strategic investments.

David Menlow of research firm IPOfinancial conceded that Vonage has a strong brand name but noted that it lacks proprietary technology to set it apart. Hear interview with David Menlow.

"They have too narrow a focus," Menlow said. "The real brass ring is video. That's where the money is, not in voice over Internet protocol. ... What you will see is a deployment of this kind of video and the companies will throw in VoIP for free. Vonage has nothing unique to ensure that customers will be there for lengthy periods."

While the company could turn a profit by 2008, investors may not want to wait that long, Menlow said.

MasterCard IPO awaits

On Vonage's heels comes another big-money deal. MasterCard
MA, -4.90%
in fact, looms as the richest U.S. IPO in two years. The credit-card giant is set to offer 61.5 million shares at an estimated price of between $40 and $43 a share for its stock-market debut Thursday.

And in an overseas deal that dwarfs even MasterCard's, Bank of China priced near the high end of its range in a bid to raise $9.72 billion as the world's richest IPO in nearly six years. See full story.

With 155.7 million shares outstanding, Vonage went public with a market capitalization of nearly $2.65 billion, less than the $4 billion eBay
EBAY, -0.57%
spent to buy rival Internet phone service Skype last year.

Vonage Chairman Jeffrey Citron, 35, emerged from the IPO with a 33% stake in the company, which he founded. His holdings were valued at about $875 million at the $17-a-share IPO price.

Citron stepped down as chief executive in February, when Vonage named Mike Snyder, an executive from the ADT business of Tyco International
TYC, +74.50%
to the post.

Citron once paid $22.5 million in civil penalties in one of the largest fines ever collected by the Securities and Exchange Commission against individuals, according to regulatory filings by the Internet phone company.

Citron also agreed to accept an SEC order that permanently bars him from association with any securities broker or dealer. The 2003 settlement came after an SEC probe of the online trading firm Datek.

Citron settled theses charges without admitting to or denying the allegations set forth in the SEC complaint.

In 1998, at the age of 27, Citron served as CEO of Datek, which was later acquired by Ameritrade.

In 1995, Citron founded Island ECN, a computerized order-execution system for stocks.

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